From the Abstract:
We examine whether climate transition risk affects the cost of capital and how investors value green innovation. Using confidential bond-level holdings and global firm data, we find evidence of a positive transition risk premium. This premium is lower for emission-intensive firms that actively engage in green innovation, suggesting that investors recognize and reward efforts to mitigate climate change. While investors divest from emission intensive firms, our findings suggest that those with greater risk-bearing capacity play a crucial role in the green transition by channeling capital toward emission-intensive firms that actively invest in green innovation. European institutional investors, particularly mutual funds, demonstrate a stronger demand for bonds issued by these firms, reducing their cost of capital relative to other emission intensive firms.
